Liquidity is what Makes the Magic Happen…in Bull Markets

The Fed says their job isn’t done

On CNBC this morning federal reserve member Neal Kashkari said that due to the blow out non-farm jobs payroll report, that their job is not done.

Kashkari’s hinted that the fed funds rate needs to rise to 5.4% from the present 4.7% target. Kashkari is on the more aggressive side amongst is compadres who indicated in December that 5.1% was the target. In addition to raising rates, continued balance sheet roll off at a $95 billion a month is still in effect.

Liquidity…the effects

I’m 2009 and 2020 open the dam on money printing and quantative easing (QE) causing markets to be flush with cash as well as citizens. In 2020, combined with supply chain disruption, prices on goods inflated along with energy prices and in particular, stocks. Today we have a much different environment as the Fed raises the cost and reduces the liquidity of money in the global economic system. What isn’t being taken in account is that the raises of fed funds rate has not truly tripled in to the system and often times dozen for six months after Federal chairman Powell adjust the fed funds rate. In essence, we have not seen the effects in full view of what the Federal Reserve has done yet. The aggressive stance of raising to 5.4% could be devastating to the US economy. The federal reserve has a habit of overshooting, both on the increase side and the reduction side. My believe is that this news in the short term will cause markets to pivot and move lower. We saw that over the last two days trading with the NASDAQ 100, S&P 500, and the Dow moving lower.  What will be the trigger that will cause this market to fall lower? It’s the consumer. The headlines have not reported that a great number of those who make six figures incomes are living paycheck to paycheck. The headlines have not reported that savings rates have declined into negative numbers.  Contrary to the nonfarm, payroll support, companies are laying people off specifically in the tech industry. Some of this can be due to the over hiring during the pandemic Boom, but if the economy continues to slow, the fair continues to shoot for a 2% inflation rate, and the cost of money continues to rise, the consumer at some point, will not be able to afford to service their debt or continue to purchase at the rates we have been used to seeing in earnings for parts from companies, such as Apple, Amazon, Tesla, Facebook, and Google. All these companies are in the NASDAQ 100 top 10. They rely on the consumer to purchase their products. If your consumer is not strong in a consumption based economy, then the companies that depend on the consumer will eventually pay the price.

The returns of the top 10 NASDAQ 100 companies that occupy over 50% of the trip QQQ ETF are dependent on the consumer.  This is why my investment thesis continues to be short on the NASDAQ 100. If we hit my price target on companies such as Tesla, who I did a video on Best of US Investors on Sunday that suggested $77 would be a good place to start accumulating Tesla at a 21 PE ratio in comparison to its 52 PE ratio of today, such a move would get the QQQ’s inline with what maybe the Feds target 🎯 rates. Unfortunately, with such aggressive raising of fed funds rate cost to service one’s dead skyrocket. Many companies who were over exuberant with borrowing during the pandemic, are now suffering, the pains of servicing their debt.

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